The Cyprus government has maintained a prudent fiscal policy and amassed reserves to confront further crises or to provide extended support in the current one, economist Fiona Mullen of the Nicosia-based Sapienta Economics told the Cyprus Mail in an interview on Thursday.
There is €4.2 billion in reserves at the central bank. A spokesperson for the Finance Ministry confirmed this to the Cyprus Mail.
“The government has issued considerable debt since last year, but ample funds to cover current debt are being held in reserve,” Mullen explains.
“At the end of December, public debt stood at €20.96 billion, or at 95.5 per cent of GDP. This was good news, as it was the first time in years that public debt was at under 100 per cent first of GDP,” she says.
“Since then, the government has however issued a lot of debt, and public debt stood at €24.4 billion as of the end of May. It is likely that it will reach 120 per cent of GDP by the end of this year,” Mullen continues.
Public debt can pose a severe challenge to governments when the only way to fund it is through borrowing, and no one will lend, Mullen points out.
“This is not the case of Cyprus at present, though. According to central bank figures, the government has €4.2 billion in funds parked – meaning that they are not being used for short-term expenses,” she says. “Current expenditure is being covered almost entirely by 13-week treasury bills.”
Why should the government issue debt and not spend cash?
“You have to think back to 2013,” Mullen says. “At that time, at the outset of the crisis, the government had less than €500,000 in the bank. They were totally unprepared to cope with the crisis. This government, on the other hand, is making certain that it can confidently confront the near- and medium-term.”
The reserves parked in the bank are enough to cover the entire offset until 2023, according to Mullen. “So, if things get worse, there are funds available.”
All of this is not keeping the government from running up the budget deficit. Last year, there was a €241 million surplus, or 2.8 per cent of GDP, but this year, for the January to June period, there is a deficit of €805 million, or about 3.7 per cent of 2019 GDP, Mullen says, noting that GDP will be smaller in 2020 – in June, Cyprus GDP contracted 11.9 per cent.
“The overall feeling, across Europe, is that austerity was a mistake. Austerity simply led to Populist governments which threatened the unity of the EU. The reaction has been for governments to spend within reason,” Mullen comments.
One should also bear in mind that interest rates are low, so government borrowing isn’t expensive. “Cyprus can borrow today at the rate of about one per cent, as opposed to eight or nine per cent in previous years,” Mullen adds.
“Despite rising expenses, I think overall that things are moving in the right direction, Mullen concludes.”